The London Stock Exchange (LSE) is taking steps to stem the number of companies leaving its junior market, AIM.
In the last year, the number of companies choosing to delist from AIM has risen significantly, while the number of new listings has fallen dramatically.
AIM listings, which peaked at nearly 1,700 in December 2007, have now plummeted to 1,524, while according to The Times, the value of trade on the market in January was just £1.6bn, compared to £5.4bn in the same month last year.
According to Chris Langridge, a partner and head of corporate finance at Cripps Harries Hall Solicitors, a number of factors have contributed to this decline.
“Companies choosing to delist do so usually because they no longer consider that the benefits of being listed on the AIM market outweigh the expense,” he said.
“The cost of maintaining a listing (NOMAD fees etc) has been estimated at £150,000 a year together with the management time required to ensure compliance with the AIM rules.”
While the availability of finance for smaller, fast-growth firms on AIM has historically made these costs acceptable, a lack of liquidity coupled with investment drying up is causing some to re-think a public listing.
“AIM companies are considered to represent a riskier investment than those with a listing on the main market and the smaller cap companies are perceived as even riskier, leading to a loss of appetite for investors for these types of businesses,” Langridge added.
“The current economic climate has meant that often companies do not believe they will be able to raise sufficient funds to make the exercise worthwhile. The costs of coming to the market are on average 6.5% of the monies raised, but the less money raised, the higher the percentage.”
Falling share prices have also thwarted some AIM-listed firms' acquisition plans.
“One of the reasons some companies will have listed is that they wish to make corporate acquisitions by issuing their shares as currency for all or a significant part of the consideration,” Langridge continued.
“A low share price means more shares need to be issued, or in a worst case scenario, a selling shareholder is not prepared to accept the buyer’s paper as consideration.”
He said that changes to the rules relating to venture capital trusts (VCTs) in 2006, which prohibited them from investing in companies with assets worth more than £7m or which employ more than 50 people, have also played a significant role in the lack of finance on the market.
The exchange is now calling for the government to change the VCT eligibility criteria for companies by raising the limits to £25m in assets and up to 200 employees, and has announced a number of steps it will be taking to restore confidence in the market.
Langridge said: “The London Stock Exchange has a number of plans to try and help liquidity by changing their fees on trading to make it more attractive to trade in smaller cap companies. It will also launch a new research product later this year, PSQ Analytics, which is intended to be available at a very reasonable cost.”
© Crimson Business Ltd. 2009